How to Build Your Credit in 4 Easy Steps
By Becca Allison
Do you have credit? If not, then reading this might help you to build your credit and manage your credit as time goes on.
Do you know what credit is?
Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. In general, the “trust” is granted by a financial company, in most cases a bank, which will extend you credit.
However, to receive credit, loans, or financing from any bank or financial institution, you will have to have what is known as good credit. Yes, you actually have to have credit before more is extended to you.
But before we go into the details of how to acquire a credit card and start building credit, let’s review some key “ credit” terminology.
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What Is Credit: Key Terms You Need To Know
Definition - Credit is the ability to obtain goods and services before payment, based on the trust that payment will be made in the future.
Annual Fee - A yearly fee banks charge for the privilege of using their credit card
Annual Percentage Rate - Lenders are required by law to disclose the APR, which is a yearly interest rate that includes fees and costs paid to acquire the loan
Average Daily Balance - This is how most credit card issuers calculate your payment due
Balance Transfer - This simply means moving an unpaid credit card debt from one card to another
Credit Limit - Is the maximum amount your allowed to borrow on a card
Late Fee - An extra fee charged after you miss your payment date
Minimum Payment - The minimum amount you must pay to keep the account from defaulting
Over-Limit Fee - If you exceed the credit limit on a card, you will be charged a fee.
Grace Period - Is the interest- free period time a lender allows between a transaction date and the billing date for cardholders who do not carry a balance
Finance Charge - The charge for using a credit card, including interest costs and other fees
Now that we’ve discussed the key terms you need to know about credit. Let’s take out some time to talk about ways for you to build and improve your credit.
How to Build Your Credit
Here are ways you can build your Credit (for people who don’t have a credit card)
- Sign up for a Credit Card
If you’re starting from scratch, then you should start out by signing up for a credit card. You should start by signing up for entry level credit cards such as secured credit cards, student credit cards, or store credit cards. They will help you build credit and don’t require long credit history for approval.
- Apply for a Loan
If you get approved for a loan, make sure you make on-time payments for your loans. This will help you to increase your credit score. Keep in mind that making late payments will have adverse effects on your credit score.
- Be an Authorized User on Your Parent’s Account
If your parents own their own credit cards with rewards, they can make you an authorized user. This will be both beneficial for you and your parents because you will have a chance to build up your own credit and they can rack up points or cash back on places you shop at.
- Get a co-signer
If you’re not able to get approved for a loan, to rent an apartment, or to buy your first car. If you can find someone willing to cosign for you such as your parents, grandparents, or a friend with good credit. The only downside of using this method to build your credit is that you and your co-signer will be held responsible for repaying the amount owed.
Here are ways you can improve your Credit Score ( for people who own a credit card)
- Pay Your Full Amount On Time
In order to increase your credit score, you should make sure to pay off your entire balance each month to avoid interest charges. If you’re not able to do that, make sure you pay more than your minimum payment required.
- Use only 30% of your credit limit
Don’t go maxing out your credit card by spending your full credit limit. This will not help you to improve your overall credit score and will keep you paying off more debt than you can afford. Aim to spend 30% of your credit card. This will help you to improve your credit score and keep you from putting yourself too much into debt.
- Check your Credit Score
It doesn’t hurt to check your credit score to see what areas you need to improve on and work towards. You are allowed to check your credit report once every year.
- Keep Your Accounts Open
Even if you pay off your credit cards, it’s better for you to keep your accounts open unless you have too many credit card accounts open. Keep one credit card account open and available for use. This will help lenders to access your credit history and length of your payment history when they are going through your approval process for loans or credit cards.
Now that we know how to build and improve your credit. It’s time to learn the difference between good credit and bad credit.
Bad Credit Vs Good Credit
In order, to know the difference between good credit and bad credit you need to know how your credit score is calculated.
100% of your credit is determined by the following things
- Amounts Owed (Debt) - 30%
- Payment History - 30%
- New Credit - 10%
- Length of Credit History - 15%
- Credit Mix -10%
Most of your credit is determined by the amount of debt you owe and how often you pay your credit card bill on time. It’s very important to know how your credit is determined to figure out the best way to work on your credit. If you regularly make your payments on time, have less debt you owe and have a good standing relationship with your lenders, you probably have good credit. If you’re late on payments or don’t pay your bills on time, and max out your credit cards, you probably have bad credit. It’s better to check your credit score on sites like Credit Karma, Free Credit Report, and Experian to name a few. It doesn’t hurt your credit to check your credit score as long as you only check it once a year. This will help you to see what you need to work on to improve your score.
The Impact Credit Can Have on Your Financial Future
Having good credit can really set you up for financial success while having bad credit can set you up for the direct opposite. If you’re careful about how you choose to handle your credit , you can find that maintaining good credit is not as difficult as it might seem. This will allow you to achieve your financial goals such as affording your dream home, purchasing your dream car, or getting approved for the loan for your business.
Conclusion
If you’re like most Americans, you’re probably in some kind of debt that will take you some years to pay off. It’s best for you to start paying off your debt now than to wait a couple of years to start getting serious about your debt. If you’re trying to figure out the best way for you to build your credit, it is to get ahead of your debt. Using these tips will help you to not only improve your credit score but to make steps towards a brighter financial future.
